Goverment Hides Spending

Government tries to hide some of its spending&debt from the public

For example as you'll read below, federal liabilities are about $6.5 trillion higher than the official national debt (without addressing the issue of unfunded future liabilities).

Thomas Jefferson wrote while president that politicians were already trying to hide spending:

"We
might hope to see the finances of the Union as clear and intelligible
as a merchant's books, so that every member of Congress and every man of
any mind in the Union should be able to comprehend them, to
investigate abuses, and consequently to control them. Our predecessors
have endeavored by intricacies of system and shuffling the
investigation over from one office to another, to cover everything from
detection.

A few years ago the Comptroller General of the United States (a Clinton appointee) referred to that quote in an oped explaining "Unfortunately, straightforward government financial information seems as elusive in 2004 as it did in Jefferson’s day. .. But the current system of federal financial reporting provides an unrealistic and even misleading picture of the government’s overall performance and financial condition....Who would knowingly buy stock in, lend to, or do business with a company that conceals its true financial condition?" The problem occurs at the federal level and is even more pronounced in official federal BEA (Bureau of Economic Analysis) totals for state, local and all-government-levels spending.

Most people would assume government spending figures include *all* spending when they report what they claim to be total "outlays" or "expenditures" or "costs", all revenue under "receipts" and all liabilities in total debt figures. In most cases they don't. Some government programs subtract certain receipts they get from their expenses, rather than reporting expenses and revenue separately. This lets government pretend to spend less than it does. Note: if your eyes glaze over with too many numbers or accounting terms, you might still find it useful to continue skimming this to get at least some idea of the games government pays to hide spending and debt.

The FY (Fiscal Year) 2013 proposed federal budget at the White House site has a Chapter 16
on "Offsetting Collections and Offsetting Receipts" where it explains:
"For 2011 gross outlays to the pubic were $4152 billion [...] net
outlays were $3,603 [...] Offsetting collections and offsetting receipts
from the public are subtracted from gross outlays to the public to
yield “net outlays,” which is the most common measure of outlays cited
and generally referred to as simply 'outlays' ". The proposed
budget figures are only "net outlays". Although the budget's "Historical tables" page
has categories it claims are "Total outlays" or "Total Government
Expenditures" they are only "net outlays". There doesn't appear to be a
table of historical "gross outlay" data online. Almost every figure reported in any media is referring to "net outlays".

They have played this game for years. In 1977 the Comptroller General published a report: "Full Disclosure Needed for Better Congressional Control" which said: " the netting of receipts against gross outlays
tends to understate the total size of the budget relative to the
national economy [...] the total amount of Government activities is
understated [..] for fiscal year 1977 [..] approximately 20 percent of
the total Federal receipts and outlays projected for the year [...]thus, the Congress does not have the most complete information for making future budget decisions .[...] The netting of receipts against gross outlays conceals the factors that determine the net outlay amounts. These factors can have significant economic importance.". The problems still haven't been fixed.

The budget also notes that: "Gross outlays to the public are derived by
subtracting intragovernmental outlays from gross outlays. For 2011,
gross outlays were $5,291 billion". It is likely they count transfers within the government as "outlays" in part so they can use the corresponding "receipts" elsewhere to offset outlays to the public to remove them from the "net outlay" figure. The budget document doesn't explicitly address whether they might have
ways to hide spending from the "gross outlays" figure as well.

The budget is created using mostly a cash accounting method. The US
Treasury uses a different accounting standard (a mostly accrual
approach) to report its main figures in its annual "Financial Report of the U.S. Government" as "net costs". In the private sector more than one accounting method may be used to make finances more transparent to aid the planning process. In this case it seems to aid in obscuring spending. The Treasury pulls the same trick to hide spending and explains: "The Government derives its net cost ($3.8 trillion in FY 2012) by subtracting revenues earned from Government programs".

In reality no reliable figure exists for how much it spends even for "net outlays" or "net costs" regardless of the accounting method used. The Government Accountability Office reports on the US Treasury's annual report: "GAO is required to audit these statements. " yet the financial records are in such poor shape they can't: "material weaknesses in internal control over financial reporting and
other limitations on the scope of its work resulted in conditions that
prevented GAO from expressing an opinion on the fiscal years 2012 and
2011 accrual-based consolidated financial statements". This problem has existed ever since they first began trying to conduct an audit: " since the federal government began preparing consolidated financial
statements 16 years ago, three major impediments continued to prevent
GAO from rendering an opinion on the federal government’s accrual-based
consolidated financial statements over this period".

Projections of future federal debt and finances by GAO (Government
Accountability Office), CBO (Congressional Budget Office) and OMB
(Office of Management and Budget) all deal only with "net
outlays". They are mostly concerned with determining how much spending will compare to taxes in the future, so net outlays should be good enough.

One concern however is that the plans for this future hidden spending might overestimate the future receipts available to cover it. They may plan hidden spending of $X by projecting it will be offset by $X in receipts, and when the $X isn't available then tax funds may be needed to cover the added deficit. "Public enterprise funds" are one type of program which may offset some receipts against expenses. The "Full Disclosure" report illustrated the problem when it examined the "net outlays" of those funds (the spending had which to be covered by taxes) in the several years before the report: "the actual net outlays for public enterprises revolving funds exceeded the original estimate of those outlays in each year. This trend appears to have continued though fiscal year 1976 [..] The percentage of increases in outlay amounts had an equally wide range-- from 8 percent to about 500 percent." Although more recent information hasn't been found, it seems likely the pattern has continued.

Most figures quoted for the national debt are misleading

The Treasury's annual report states that at the end of FY2012 federal debt subject to the debt limit, was $16.027 trillion. However it also gives a larger figure for "total liabilities":

"The $18.8 trillion in total liabilities is comprised mostly of: (1) $11.3 trillion in Federal debt securities held by the public and accrued interest2 and (2) $6.3 trillion in Federal employee and veteran benefits payable. The Government also reports about $4.9 trillion of intragovernmental debt outstanding, which arises when one part of the Government borrows from another. The sum of debt held by the public and intragovernmental debt equals gross Federal debt,"

That listed three categories of liabilities. The official national debt is based on 2 of them : "The sum of debt held by the public and intragovernmental debt equals gross Federal debt, which, with some adjustments, is subject to a statutory ceiling (i.e. the debt limit)". Their "total liabilities" figure uses 2 different ones, they add federal employee benefits but take out intragovernmental debt. If you add all three together you get $22.5 trillion in liabilities. This doesn't include several $tens or hundreds of trillions of "unfunded liabilities", money they expect to be short for future social security and medicare payments (estimates vary, this site addressed the issue previously).. The GAO notes that the accrual accounting method leads to different deficit figures than what the budget reports:

Even the "cash deficit" figures are misleading since they don't actually match what the government borrowed to cover the deficit each year. The US Treasury gives official figures for the national debt at the end of each fiscal year. The amount they actually borrowed provides a more accurate measure of an "actual cash deficit" than the artificial cash deficit figure they concoct based on financial statements that are such a mess they can't be audited. Comparing it to the figures above, it is more than the claimed "cash deficit" except for one year (they goofed and managed to have a higher figure for 2011).

You'll see the mythical "Clinton surplus" was an accounting trick that disappears. A more useful figure which isn't provided would combine the cash deficit with the liabilities for things like federal pensions to get a better indication of how much total liabilities change each year.

Accrual accounting is used by businesses to give better insight into the ongoing cost of operations compared to revenue. The two different federal accounting seem partly focused on making figures less transparent to the public rather than more. It can be useful to spread the effective cost of facilities over time for a private entity but it can be misleading to people that aren't used to it when examining government finances. The GAO notes:
"the federal government reports physical assets when they are acquired
and records the related expenses only when the assets are sold or when
the federal government beneﬁts from their use or consumption". This means government might e.g. pay out $10 billion in cash for some category of expenses, and yet only record say $1 billion as the depreciated expense expenses each year for the next 10 years. That decreases the spending of the current administration compared to a cash accounting approach, but increases the spending that will show up in the accounts of future administrations.

Totals for government spending at all levels are misleading.

The federal BEA (Bureau of Economic Analysis) is the source of figures for total government spending at all levels combined. The BEA describes the differences between its measures of government spending, noting that "Total spending by government is much larger than the spending included in GDP. " Its "total expenditures" figures include the most, however they also hide spending.

They provide a figure for "Total expenditures of government" (federal, state, and local combined) of $5,642.9 for 2011 using their usual NIPA (National Income and Product Accounts) accounting approach. However they also report data using the international SNA (System of National Accounts) standard which hides less spending of $6,251.4 billion in total expenditures. That is higher by about 11%, $608.5 billion, yet the descriptions of what it includes indicate that is still too low.

The biggest issue is related to the problem discussed before. When government receives any sort of fees for a service, it may use that as an excuse to hide expenses in one of a couple of ways. The BEA provides "A Primer on GDP and the National Income and Product Accounts" where they describe the components of national accounts. They hide many government activities in the business sector: "Businesses [... ]The sector comprises [...] and government enterprises. Government enterprises are government agencies [...]—that cover a substantial portion of their operating costs by selling goods and services to the public." In their more detailed description of government accounts they note: "Government enterprises are government institutional units that are classified in the business sector because they sell their goods and services directly to the public for an economically significant price". That means if they nationalized an industry, most of their accounting figures would still classify it as a "business" even if it was under political control and run to benefit special interest groups (e.g. paying suppliers and favored unions more, lowering prices for some favored politically connected groups, while perhaps losing other customers when they raise prices to cover that). If all private companies were nationalized, most figures would still pretend they were in the "business" sector.

The BEA figures for federal spending are different than the Treasury and White House numbers and merely hide different spending. They say: "First, the budget nets certain receipts against outlays whereas the NIPAs record a receipt". e.g. if the feds have a fee of $10 for a service that costs $20 they might only record a $10 expense rather than $20 in expenses and $10 in receipts. The BEA plays the same game, merely in different places, continuing "Second, in some cases the budget records a receipt while the NIPAs record an offset against current expenditures.". There are timing and other difference in their methodology which impact a direct comparison, but for 2011 they only give $3,923.2 for "total expenditures" for the federal government. The BEA data using the international SNA standard hides a little less spending but isn't much different at $3,940.2 billion for 2011 for "central government" total expenditures.

The major difference between the NIPA and SNA figures for "total government" expenditures arise in state&local spending due to more offsetting of receipts against expenses. The BEA compares their figures for state&local government expenditures to Census Bureau estimates which are rather different since they hide less spending that way. The latest comparison in Table 3.19 is for 2010 where the Census Bureau gives a figure of $3,114.8 billion combined state&local spending while the BEA's figure is $2,112.6 billion for "current expenditures" (elsewhere "total expenditures" for state&local are $2,278.6 billion). Using the international SNA approach they report $2,842.2 billion for 2010.

When describing the differences with the Census figures it notes the same issue with hiding expenditures of government enterprises: "In the NIPAs, expenditures are generally shown net of related sales revenue". It also gives a clue where else they hide government spending: "These differences include transactions associated with state and local
government retirement plans, which the NIPAs account for in the
household, not government sector".

A better estimate for total government expenses might be derived from
combining federal budget figures for "gross outlays" with Census
figures for state and local spending (with any overlap removed), but the
government doesn't provide that. It might be possible for the public to combined the figures, though there are compatibility issues which would have to be addressed. One difference
is that unemployment insurance is treated as a state expense in
Census figures and a federal expense in the BEA figures.

In a description of the SNA
standard on the UN site they give a more concrete criteria for government enterprises than the BEA provides in its description of the NIPA standard. It says: "9.34. As
long as those entities can charge market prices or prices that cover
over 50 percent of costs, they are excluded from the government sector." i.e. a government could nationalize an industry,
subsidize 49% of its costs, and it would still be kept in the "business
sector". The major sources (probably all sources, this site hasn't found an exception) for international economic data rely on these "total expenditure" figures which won't
give a complete picture of how much of a country's economy is under
government control. It seems possible some countries may hide additional spending from even the incomplete "total expenditure" figures that are provided. (e.g. it might be interesting to examine the history of figures from Greece to see if they covered up some of their problems).

International economic studies that do cross country comparisons regarding government spending should be approached with caution to consider whether the use of incomplete figures for government spending might impact their conclusions at all. It is useful for some purposes to have government spending figures which separate out the elements of government which operate in a "business-like" fashion. There is also an unmet need for figures which breakout the share of economies which are under government control.

"The accounts of the United States
ought to be and may be made as simple as those of a common farmer and
capable of being understood by common farmers." --Thomas Jefferson